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Vol. 78 Tuesday, No. 175 September 10, 2013 Part II Federal Deposit Insurance Corporation 12 CFR Parts 303, 308, 324, et al. Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule; Interim Final Rule S2 E UL R with D O R P N1 V T Q K67 S D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\10SER2.SGM 10SER2 e 55340 Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations FEDERAL DEPOSIT INSURANCE the FDIC’s regulatory capital • Hand Delivery: Comments may be CORPORATION requirements that meet the requirements hand delivered to the guard station at of section 171 and section 939A of the the rear of the 550 17th Street Building 12 CFR Parts 303, 308, 324, 327, 333, Dodd-Frank Wall Street Reform and (located on F Street) on business days 337, 347, 349, 360, 362, 363, 364, 365, Consumer Protection Act. between 7:00 a.m. and 5:00 p.m. 390, and 391 The interim final rule also codifies the Public Inspection: All comments RIN 3064–AD95 FDIC’s regulatory capital rules, which received must include the agency name have previously resided in various and RIN 3064–AD95 for this Regulatory Capital Rules: Regulatory appendices to their respective rulemaking. All comments received will Capital, Implementation of Basel III, regulations, into a harmonized be posted without change to http:// Capital Adequacy, Transition integrated regulatory framework. In www.fdic.gov/regulations/laws/federal/ Provisions, Prompt Corrective Action, addition, the FDIC is amending the propose.html, including any personal Standardized Approach for Risk- market risk capital rule (market risk information provided. Paper copies of weighted Assets, Market Discipline rule) to apply to state savings public comments may be ordered from and Disclosure Requirements, associations. the FDIC Public Information Center, Advanced Approaches Risk-Based The FDIC is issuing these revisions to 3501 North Fairfax Drive, Room E–1002, Capital Rule, and Market Risk Capital its capital regulations as an interim final Arlington, VA 22226 by telephone at Rule rule. The FDIC invites comments on the (877) 275–3342 or (703) 562–2200. interaction of this rule with other AGENCY: Federal Deposit Insurance proposed leverage ratio requirements FORFURTHERINFORMATIONCONTACT: Corporation. applicable to large, systemically Bobby R. Bean, Associate Director, ACTION: Interim final rule with request important banking organizations. This [email protected]; Ryan Billingsley, Chief, for comments. interim final rule otherwise contains Capital Policy Section, rbillingsley@ regulatory text that is identical to the fdic.gov; Karl Reitz, Chief, Capital SUMMARY: The Federal Deposit common rule text adopted as a final rule Markets Strategies Section, kreitz@ Insurance Corporation (FDIC) is by the Federal Reserve and the OCC. fdic.gov; David Riley, Senior Policy adopting an interim final rule that This interim final rule enables the FDIC Analyst, [email protected]; Benedetto revises its risk-based and leverage to proceed on a unified, expedited basis Bosco, Capital Markets Policy Analyst, capital requirements for FDIC- with the other federal banking agencies [email protected], regulatorycapital@ supervised institutions. This interim pending consideration of other issues. fdic.gov, Capital Markets Branch, final rule is substantially identical to a Specifically, the FDIC intends to Division of Risk Management joint final rule issued by the Office of evaluate this interim final rule in the Supervision, (202) 898–6888; or Mark the Comptroller of the Currency (OCC) context of the proposed well-capitalized Handzlik, Counsel, [email protected]; and the Board of Governors of the and buffer levels of the supplementary Michael Phillips, Counsel, mphillips@ Federal Reserve System (Federal leverage ratio applicable to large, fdic.gov; Greg Feder, Counsel, gfeder@ Reserve) (together, with the FDIC, the systemically important banking fdic.gov; Ryan Clougherty, Senior agencies). The interim final rule organizations, as described in a separate Attorney, [email protected]; or consolidates three separate notices of Notice of Proposed Rulemaking (NPR) Rachel Jones, Attorney, racjones@ proposed rulemaking that the agencies published in the Federal Register fdic.gov, Supervision Branch, Legal jointly published in the Federal August 20, 2013. Division, Federal Deposit Insurance Register on August 30, 2012, with The FDIC is seeking commenters’ Corporation, 550 17th Street NW., selected changes. The interim final rule views on the interaction of this interim Washington, DC 20429. implements a revised definition of final rule with the proposed rule SUPPLEMENTARYINFORMATION: regulatory capital, a new common regarding the supplementary leverage equity tier 1 minimum capital ratio for large, systemically important Table of Contents requirement, a higher minimum tier 1 banking organizations. I. Introduction capital requirement, and, for FDIC- DATES: Effective date: January 1, 2014. II. Summary of the Three Notices of Proposed supervised institutions subject to the Mandatory compliance date: January 1, Rulemaking advanced approaches risk-based capital 2014 for advanced approaches FDIC- A. The Basel III Notice of Proposed rules, a supplementary leverage ratio supervised institutions; January 1, 2015 Rulemaking that incorporates a broader set of for all other FDIC-supervised B. The Standardized Approach Notice of exposures in the denominator. The institutions. Comments on the interim Proposed Rulemaking interim final rule incorporates these final rule must be received no later than C. The Advanced Approaches Notice of new requirements into the FDIC’s November 12, 2013. Proposed Rulemaking III. Summary of General Comments on the prompt corrective action (PCA) ADDRESSES: You may submit comments, Basel III Notice of Proposed Rulemaking framework. In addition, the interim final identified by RIN 3064–AD95, by any of and on the Standardized Approach rule establishes limits on FDIC- the following methods: Notice of Proposed Rulemaking; supervised institutions’ capital • Agency Web site: http:// Overview of the Interim Final Rule distributions and certain discretionary www.fdic.gov/regulations/laws/federal/ A. General Comments on the Basel III bonus payments if the FDIC-supervised propose.html. Follow instructions for Notice of Proposed Rulemaking and on institution does not hold a specified submitting comments on the Agency the Standardized Approach Notice of S2 amount of common equity tier 1 capital Web site. Proposed Rulemaking ULE in addition to the amount necessary to • Email: [email protected]. Include 1. Applicability and Scope R 2. Aggregate Impact ROD with mraemeqeeutni ridetssm tmhenien tmsim. eTuthhmoe dirnoistlkeo-rgbiimaess e ffidon rac la pruitlael tohf e•t hRMeI Nmai 3el:s0 Rs6ao4gb–eeA.r tD E9.5 F oenld tmhea nsu, bEjxeecct ulitnivee 34.. CCoomstsp etitive Concerns VN1P determining risk-weighted assets for all Secretary, Attention: Comments, Federal B. BCaosmelm IIeI nNtso toince P oafr tPicrouplaors eAds pReucltesm oaf kthineg T SK67Q FinDteICri-msu fpineravl irsuelde ianlsstoi taudtioopntss. cThhaen ges to DSterpeoets iNt WIns.,u Wraanschei nCgotropno,r DatCio 2n0, 452590. 17th aNnodti ocen othf eP rSotpanosdeadrd Rizueledm Aapkpinroga ch D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations 55341 1. Accumulated Other Comprehensive in the Capital of Unconsolidated E. Cleared Transactions Income Financial Institutions 1. Definition of Cleared Transaction 2. Residential Mortgages i. Indirect Exposure Calculations 2. Exposure Amount Scalar for Calculating 3. Trust Preferred Securities for Smaller j. Non-Significant Investments in the for Client Exposures FDIC-Supervised Institutions Capital of Unconsolidated Financial 3. Risk Weighting for Cleared Transactions C. Overview of the Interim Final Rule Institutions 4. Default Fund Contribution Exposures D. Timeframe for Implementation and k. Significant Investments in the Capital of F. Credit Risk Mitigation Compliance Unconsolidated Financial Institutions 1. Guarantees and Credit Derivatives IV. Minimum Regulatory Capital Ratios, That Are Not in the Form of Common a. Eligibility Requirements Additional Capital Requirements, and Stock b. Substitution Approach Overall Capital Adequacy l. Items Subject to the 10 and 15 Percent c. Maturity Mismatch Haircut A. Minimum Risk-Based Capital Ratios and Common Equity Tier 1 Capital Threshold d. Adjustment for Credit Derivatives Other Regulatory Capital Provisions Deductions Without Restructuring as a Credit Event B. Leverage Ratio m. Netting of Deferred Tax Liabilities e. Currency Mismatch Adjustment C. Supplementary Leverage Ratio for Against Deferred Tax Assets and Other f. Multiple Credit Risk Mitigants Advanced Approaches FDIC-Supervised Deductible Assets 2. Collateralized Transactions Institutions 3. Investments in Hedge Funds and Private a. Eligible Collateral D. Capital Conservation Buffer Equity Funds Pursuant to Section 13 of b. Risk-Management Guidance for E. Countercyclical Capital Buffer the Bank Holding Company Act Recognizing Collateral F. Prompt Corrective Action Requirements VI. Denominator Changes Related to the c. Simple Approach G. Supervisory Assessment of Overall Regulatory Capital Changes d. Collateral Haircut Approach Capital Adequacy VII. Transition Provisions e. Standard Supervisory Haircuts H. Tangible Capital Requirement for State A. Transitions Provisions for Minimum f. Own Estimates of Haircuts Savings Associations Regulatory Capital Ratios g. Simple Value-at-Risk and Internal V. Definition of Capital B. Transition Provisions for Capital Models Methodology A. Capital Components and Eligibility Conservation and Countercyclical G. Unsettled Transactions Criteria for Regulatory Capital Capital Buffers H. Risk-Weighted Assets for Securitization Instruments C. Transition Provisions for Regulatory Exposures 1. Common Equity Tier 1 Capital Capital Adjustments and Deductions 1. Overview of the Securitization 2. Additional Tier 1 Capital 1. Deductions for Certain Items Under Framework and Definitions 3. Tier 2 Capital Section 22(a) of the Interim Final Rule 2. Operational Requirements 4. Capital Instruments of Mutual FDIC- 2. Deductions for Intangibles Other Than a. Due Diligence Requirements Supervised Institutions Goodwill and Mortgage Servicing Assets b. Operational Requirements for 5. Grandfathering of Certain Capital 3. Regulatory Adjustments Under Section Traditional Securitizations Instruments 22(b)(1) of the Interim Final Rule c. Operational Requirements for Synthetic 6. Agency Approval of Capital Elements 4. Phase-Out of Current Accumulated Securitizations 7. Addressing the Point of Non-Viability Other Comprehensive Income Regulatory d. Clean-Up Calls Requirements Under Basel III Capital Adjustments 3. Risk-Weighted Asset Amounts for 8. Qualifying Capital Instruments Issued by 5. Phase-Out of Unrealized Gains on Securitization Exposures Consolidated Subsidiaries of an FDIC- Available for Sale Equity Securities in a. Exposure Amount of a Securitization Supervised Institution Tier 2 Capital Exposure 9. Real Estate Investment Trust Preferred 6. Phase-In of Deductions Related to b. Gains-on-Sale and Credit-Enhancing Capital Investments in Capital Instruments and Interest-Only Strips B. Regulatory Adjustments and Deductions to the Items Subject to the 10 and 15 c. Exceptions Under the Securitization 1. Regulatory Deductions from Common Percent Common Equity Tier 1 Capital Framework Equity Tier 1 Capital Deduction Thresholds (Sections 22(c) d. Overlapping Exposures a. Goodwill and Other Intangibles (other and 22(d)) of the Interim Final Rule e. Servicer Cash Advances than Mortgage Servicing Assets) b. Gain-on-Sale Associated with a D. Transition Provisions for Non- f. Implicit Support Securitization Exposure Qualifying Capital Instruments 4. Simplified Supervisory Formula c. Defined Benefit Pension Fund Net Assets VIII. Standardized Approach for Risk- Approach d. Expected Credit Loss That Exceeds Weighted Assets 5. Gross-Up Approach Eligible Credit Reserves A. Calculation of Standardized Total Risk- 6. Alternative Treatments for Certain Types e. Equity Investments in Financial Weighted Assets of Securitization Exposures Subsidiaries B. Risk-Weighted Assets for General Credit a. Eligible Asset-Backed Commercial Paper f. Deduction for Subsidiaries of Savings Risk Liquidity Facilities Associations That Engage in Activities 1. Exposures to Sovereigns b. A Securitization Exposure in a Second- That Are Not Permissible for National 2. Exposures to Certain Supranational Loss Position or Better to an Asset- Banks Entities and Multilateral Development Backed Commercial Paper Program g. Identified Losses for State Nonmember Banks 7. Credit Risk Mitigation for Securitization Banks 3. Exposures to Government-Sponsored Exposures 2. Regulatory Adjustments to Common Enterprises 8. Nth-to-Default Credit Derivatives Equity Tier 1 Capital 4. Exposures to Depository Institutions, IX. Equity Exposures a. Accumulated Net Gains and Losses on Foreign Banks, and Credit Unions A. Definition of Equity Exposure and Certain Cash-Flow Hedges 5. Exposures to Public-Sector Entities Exposure Measurement b. Changes in an FDIC-Supervised 6. Corporate Exposures B. Equity Exposure Risk Weights Institution’s Own Credit Risk 7. Residential Mortgage Exposures C. Non-Significant Equity Exposures c. Accumulated Other Comprehensive 8. Pre-Sold Construction Loans and D. Hedged Transactions S2 Income Statutory Multifamily Mortgages E. Measures of Hedge Effectiveness ULE d. Investments in Own Regulatory Capital 9. High-Volatility Commercial Real Estate F. Equity Exposures to Investment Funds R Instruments 10. Past-Due Exposures 1. Full Look-through Approach with e. Definition of Financial Institution 11. Other Assets 2. Simple Modified Look-through OD f. The Corresponding Deduction Approach C. Off-Balance Sheet Items Approach R N1P g. Reciprocal Crossholdings in the Capital 1. Credit Conversion Factors 3. Alternative Modified Look-Through V Instruments of Financial Institutions 2. Credit-Enhancing Representations and Approach T SK67Q h. IInnsvteitsutmtioenn’tss Oinw tnh eC FapDiItCa-lS Iunpsterruvmiseendt s or D.W Oavrerra-nthtiee-sC ounter Derivative Contracts X. MRaerkqeuti rDeimsceinptlsi ne and Disclosure D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e 55342 Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations A. Proposed Disclosure Requirements XV. Paperwork Reduction Act implementation of the Basel III revisions B. Frequency of Disclosures XVI. Plain Language to international capital standards related C. Location of Disclosures and Audit XVII. Small Business Regulatory Enforcement to minimum capital requirements, Requirements Fairness Act of 1996 regulatory capital, and additional D. Proprietary and Confidential I. Introduction capital ‘‘buffer’’ standards to enhance Information the resilience of FDIC-supervised E. Specific Public Disclosure Requirements On August 30, 2012, the agencies XI. Risk-Weighted Assets—Modifications to published in the Federal Register three institutions to withstand periods of the Advanced Approaches financial stress. FDIC-supervised joint notices of proposed rulemaking A. Counterparty Credit Risk institutions include state nonmember seeking public comment on revisions to 1. Recognition of Financial Collateral banks and state savings associations. their risk-based and leverage capital a. Financial Collateral The term banking organizations b. Revised Supervisory Haircuts requirements and on methodologies for includes national banks, state member 2. Holding Periods and the Margin Period calculating risk-weighted assets under banks, state nonmember banks, state of Risk the standardized and advanced and Federal savings associations, and 3. Internal Models Methodology approaches (each, a proposal, and top-tier bank holding companies a. Recognition of Wrong-Way Risk together, the NPRs, the proposed rules, b. Increased Asset Value Correlation Factor domiciled in the United States not or the proposals).1The proposed rules, 4. Credit Valuation Adjustments subject to the Federal Reserve’s Small in part, reflected agreements reached by a. Simple Credit Valuation Adjustment Bank Holding Company Policy the Basel Committee on Banking Approach Statement (12 CFR part 225, appendix b. Advanced Credit Valuation Adjustment Supervision (BCBS) in ‘‘Basel III: A C), as well as top-tier savings and loan Approach Global Regulatory Framework for More holding companies domiciled in the 5. Cleared Transactions (Central Resilient Banks and Banking Systems’’ United States, except certain savings Counterparties) (Basel III), including subsequent and loan holding companies that are 6. Stress Period for Own Estimates changes to the BCBS’s capital standards substantially engaged in insurance B. Removal of Credit Ratings and recent BCBS consultative papers.2 underwriting or commercial activities. 1. Eligible Guarantor Basel III is intended to improve both the 2. Money Market Fund Approach The proposal included transition quality and quantity of banking 3. Modified Look-Through Approaches for periods for many of the requirements, organizations’ capital, as well as to Equity Exposures to Investment F consistent with Basel III and the Dodd- C. Revisions to the Treatment of strengthen various aspects of the Frank Act. The NPR titled ‘‘Regulatory Securitization Exposures international capital standards for Capital Rules: Standardized Approach 1. Definitions calculating regulatory capital. The for Risk-weighted Assets; Market 2. Operational Criteria for Recognizing Risk proposed rules also reflect aspects of the Discipline and Disclosure Transference in Traditional Basel II Standardized Approach and Requirements’’6(the Standardized Securitizations other Basel Committee standards. Approach NPR), would revise the 3. The Hierarchy of Approaches The proposals also included changes methodologies for calculating risk- 4. Guarantees and Credit Derivatives consistent with the Dodd-Frank Wall Referencing a Securitization Expo weighted assets in the agencies’ general Street Reform and Consumer Protection 5. Due Diligence Requirements for risk-based capital rules7(the general Securitization Exposures Act (the Dodd-Frank Act);3would apply risk-based capital rules), incorporating 6. Nth-to-Default Credit Derivatives the risk-based and leverage capital rules aspects of the Basel II standardized D. Treatment of Exposures Subject to to top-tier savings and loan holding approach,8and establish alternative Deduction companies (SLHCs) domiciled in the standards of creditworthiness in place E. Technical Amendments to the Advanced United States; and would apply the of credit ratings, consistent with section Approaches Rule market risk capital rule (the market risk 939A of the Dodd-Frank Act.9The 1. Eligible Guarantees and Contingent U.S. rule)4to Federal and state savings proposed minimum capital Government Guarantees associations (as appropriate based on requirements in section 10(a) of the 2. Calculation of Foreign Exposures for Applicability of the Advanced trading activity). Basel III NPR, as determined using the Approaches—Changes to Federal The NPR titled ‘‘Regulatory Capital standardized capital ratio calculations Financial Institutions Examination Rules: Regulatory Capital, in section 10(b), would establish Council 009 Implementation of Basel III, Minimum minimum capital requirements that 3. Applicability of the Interim Final Rule Regulatory Capital Ratios, Capital would be the ‘‘generally applicable’’ 4. Change to the Definition of Probability Adequacy, Transition Provisions, and capital requirements for purpose of of Default Related to Seasoning Prompt Corrective Action’’5(the Basel section 171 of the Dodd-Frank Act (Pub. 5. Cash Items in Process of Collection III NPR), provided for the L. 111–203, 124 Stat. 1376, 1435–38 6. Change to the Definition of Qualifying (2010).10 Revolving Exposure 177 FR 52792 (August 30, 2012); 77 FR 52888 The NPR titled ‘‘Regulatory Capital 7. Trade-Related Letters of Credit 8. Defaulted Exposures That Are (August 30, 2012); 77 FR 52978 (August 30, 2012). Rules: Advanced Approaches Risk- 2Basel III was published in December 2010 and Guaranteed by the U.S. Government revised in June 2011. The text is available at Based Capital Rule; Market Risk Capital 9. Stable Value Wraps http://www.bis.org/publ/bcbs189.htm. The BCBS is 10. Treatment of Pre-Sold Construction a committee of banking supervisory authorities, 677 FR 52888 (August 30, 2012). Loans and Multi-Family Residential which was established by the central bank 7The FDIC’s general risk-based capital rules is at Loans governors of the G–10 countries in 1975. More 12 CFR part 325, appendix A, and 12 CFR part 390, ULES2 F1.. FPrilelqaur e3n Dcyis acnlods uTriems eliness of Disclosures imanbefoomurmbt.eharttsmiho.in pD r ioescg auavrmdaeiilnnagtbs tl heis eas tuB heCdtBt pbS:y /a /tnwhdwe iwBtsC. bBisS.o arrge/ bcbs/ ssCuuFbpRpp paleramtr Zte 3 n.2 tT5ehd, ea b pgype tnehneerd aFilxD r CiIsC.k ’s-b masaerdk ecta rpiistka lr urulele i nis 1 2 R 2. Enhanced Securitization Disclosure ROD with 3. REeqquuitiyre Hmoelndtisn gs That Are Not Covered aSve3attiPlleuambblleeinc t thLsr aWowue g1bh1 s 1tih–tee2 0aB3ta ,hn 1tkt2p 4f:o /Sr/ wtIanwtt.ew 1r.3nb7ais6ti.,oo 1rng4a.3l 5–38 CRae8pvSiisteaeeld BM FCerBaamSsu,e r‘w‘eImnotreeknr,n’t’ aa(tnJiuodnn Cea al2 pC0i0ota6nl)v ,S eatrvagnaeidnlaacbredl oes f:a At N1P Positions (2010). http://www.bis.org/publ/bcbs128.htm (Basel II). TV XII. Market Risk Rule 4The FDIC’s market risk rule is at 12 CFR part 9See section 939A of the Dodd-Frank Act (15 SK67Q XXIIIVI.. ARebgburelavtioartyio Fnlse xibility Act 32557, 7a pFpRe n5d27ix9 2C .( August 30, 2012). U.1S0.CS.e e7 87o7– F7R n o5t2e8)5. 6 (August 30, 2012). D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations 55343 Rule’’11(the Advanced Approaches applicable’’ capital requirements under banking system to absorb losses in times NPR) included proposed changes to the section 171 of the Dodd-Frank Act.15 of market and economic stress. On agencies’ current advanced approaches Under the interim final rule, as under August 30, 2012, the agencies published risk-based capital rules (the advanced the proposal, in order to determine its the NPRs in the Federal Register to approaches rule)12to incorporate minimum risk-based capital revise regulatory capital requirements, applicable provisions of Basel III and requirements, an advanced approaches as discussed above. As proposed, the the ‘‘Enhancements to the Basel II FDIC-supervised institution that has Basel III NPR generally would have framework’’ (2009 Enhancements) completed the parallel run process and applied to all U.S. banking published in July 200913and that has received notification from its organizations. subsequent consultative papers, to primary Federal supervisor pursuant to Consistent with Basel III, the Basel III remove references to credit ratings, to section 324.121(d) of subpart E must NPR would have required banking apply the market risk rule to savings determine its minimum risk-based organizations to comply with the capital requirements by calculating the following minimum capital ratios: (i) A associations and SLHCs, and to apply three risk-based capital ratios using total new requirement for a ratio of common the advanced approaches rule to SLHCs risk-weighted assets under the equity tier 1 capital to risk-weighted meeting the scope of application of standardized approach and, separately, assets (common equity tier 1 capital those rules. Taken together, the three total risk-weighted assets under the ratio) of 4.5 percent; (ii) a ratio of tier proposals also would have restructured advanced approaches.16The lower ratio 1 capital to risk-weighted assets (tier 1 the agencies’ regulatory capital rules for each risk-based capital requirement capital ratio) of 6 percent, increased (the general risk-based capital rules, is the ratio the FDIC-supervised from 4 percent; (iii) a ratio of total leverage rules,14market risk rule, and institution must use to determine its capital to risk-weighted assets (total advanced approaches rule) into a compliance with the minimum capital capital ratio) of 8 percent; (iv) a ratio of harmonized, codified regulatory capital requirement.17These enhanced tier 1 capital to average total framework. prudential standards help ensure that consolidated assets (leverage ratio) of 4 The FDIC is finalizing the Basel III advanced approaches FDIC-supervised percent; and (v) for advanced NPR, Standardized Approach NPR, and institutions, which are among the approaches banking organizations only, Advanced Approaches NPR in this largest and most complex FDIC- an additional requirement that the ratio interim final rule, with certain changes supervised institutions, have capital of tier 1 capital to total leverage to the proposals, as described further adequate to address their more complex exposure (supplementary leverage ratio) below. The OCC and Federal Reserve operations and risks. be at least 3 percent. are jointly finalizing the Basel III NPR, The Basel III NPR also proposed Standardized Approach NPR, and II. Summary of the Three Notices of implementation of a capital Advanced Approaches NPR as a final Proposed Rulemaking conservation buffer equal to 2.5 percent rule, with identical changes to the A. The Basel III Notice of Proposed of risk-weighted assets above the proposals as the FDIC. This interim final Rulemaking minimum risk-based capital ratio rule applies to FDIC-supervised requirements, which could be expanded As discussed in the proposals, the institutions. by a countercyclical capital buffer for recent financial crisis demonstrated that advanced approaches banking Certain aspects of this interim final the amount of high-quality capital held organizations under certain rule apply only to FDIC-supervised by banking organizations was circumstances. If a banking organization institutions subject to the advanced insufficient to absorb the losses failed to hold capital above the approaches rule (advanced approaches generated over that period. In addition, minimum capital ratios and proposed FDIC-supervised institutions) or to some non-common stock capital capital conservation buffer (as FDIC-supervised institutions with instruments included in tier 1 capital potentially expanded by the significant trading activities, as further did not absorb losses to the extent countercyclical capital buffer), it would described below. previously expected. A lack of clear and be subject to certain restrictions on easily understood disclosures regarding Likewise, the enhanced disclosure capital distributions and discretionary the characteristics of regulatory capital requirements in the interim final rule bonus payments. The proposed instruments, as well as inconsistencies apply only to FDIC-supervised countercyclical capital buffer was in the definition of capital across institutions with $50 billion or more in designed to take into account the macro- jurisdictions, contributed to difficulties total consolidated assets. financial environment in which large, in evaluating a banking organization’s internationally active banking As under the proposal, the minimum capital strength. Accordingly, the BCBS organizations function. The capital requirements in section 10(a) of assessed the international capital countercyclical capital buffer could be the interim final rule, as determined framework and, in 2010, published implemented if the agencies determined using the standardized capital ratio Basel III, a comprehensive reform that credit growth in the economy calculations in section 10(b), which package designed to improve the quality became excessive. As proposed, the apply to all FDIC-supervised and quantity of regulatory capital and countercyclical capital buffer would institutions, establish the ‘‘generally build additional capacity into the initially be set at zero, and could expand to as much as 2.5 percent of 1177 FR 52978 (August 30, 2012). 15See note 14, supra. Risk-weighted assets risk-weighted assets. ULES2 CsuF1bR2p Tpahrater Zt F3, D2aIp5C,p ’aesp napddeivxna dAnic.x eT Ddh ,ae ap anpddrv o1aa2nc chCeeFdsR ra upplaperrsto i3as9c a0ht,e 1s 2 cscuaallbccpuuallraattt eiFod no usf ntohdfe er riis ntkht-eewr imemiag rfhiknteeatd lr riasusksle ef trasar mbe oeitnwhc oluurnkdd eiendr itnh e a 4T pheer Bceanset lm IIiIn NimPuRm p rloepvoersaegde t roa atipop ly R D with rul1e3 Sise esu ‘‘pEpnlhemanecnetmede nbtys tthoe t hmea Brkaeste lr iIsIk f rraumlee.w ork’’ satpapnrdoaarcdhiezse.d approach and the advanced r(ceoqmuipreumteedn ut stoin agl lt hbea nnkeiwn gd oerfignaintiiozant ioofn s RO (July 2009), available at http://www.bis.org/publ/ 16An advanced approaches FDIC-supervised capital), and to eliminate the exceptions P TVN1 bc1b4sT15h7e. hFtDmIC. ’s tier 1 leverage rules are at 12 CFR iandsjtuistutetdio tno tmalu tsot dalestoe rumsein iets i tasd tvoatnalc erids-ka-pbpasroedac hes- for banking organizations with strong SK67Q 3sa2v5i.n3g (ss taastseo ncoiantimonems).b er banks) and 390.467 (state cap17itSael er asteicot.i on 10(c) of the interim final rule. smuaprekrevti rsiosrky rrualtein. Tgsh oe rB sausbejle IcItI tNoP tRhe a lso D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e 55344 Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations proposed to require advanced sensitivity, and address weaknesses in organizations to conduct more rigorous approaches banking organizations to the regulatory capital framework credit analysis of securitization satisfy a minimum supplementary identified over recent years, including exposures; and would have enhanced leverage ratio requirement of 3 percent, by strengthening the risk sensitivity of the disclosure requirements related to measured in a manner consistent with the regulatory capital treatment for, those exposures. the international leverage ratio set forth among other items, credit derivatives, The agencies proposed to apply the in Basel III. Unlike the FDIC’s current central counterparties (CCPs), high- market risk rule to SLHCs and to state leverage ratio requirement, the proposed volatility commercial real estate, and and Federal savings associations. supplementary leverage ratio collateral and guarantees. III. Summary of General Comments on incorporates certain off-balance sheet In the Standardized Approach NPR, the Basel III Notice of Proposed exposures in the denominator. the agencies also proposed alternatives Rulemaking and on the Standardized To strengthen the quality of capital, to credit ratings for calculating risk- Approach Notice of Proposed the Basel III NPR proposed more weighted assets for certain assets, Rulemaking; Overview of the Interim conservative eligibility criteria for consistent with section 939A of the Final Rule regulatory capital instruments. For Dodd-Frank Act. These alternatives example, the Basel III NPR proposed included methodologies for determining A. General Comments on the Basel III that trust preferred securities (TruPS) risk-weighted assets for exposures to Notice of Proposed Rulemaking and on and cumulative perpetual preferred sovereigns, foreign banks, and public the Standardized Approach Notice of securities, which were tier-1-eligible sector entities, securitization exposures, Proposed Rulemaking instruments (subject to limits) at the and counterparty credit risk. The Each agency received over 2,500 BHC level, would no longer be Standardized Approach NPR also public comments on the proposals from includable in tier 1 capital under the proposed to include a framework for banking organizations, trade proposal and would be gradually risk weighting residential mortgages associations, supervisory authorities, phased out from tier 1 capital. The based on underwriting and product consumer advocacy groups, public proposal also eliminated the existing features, as well as loan-to-value (LTV) officials (including members of the U.S. limitations on the amount of tier 2 ratios, and disclosure requirements for Congress), private individuals, and capital that could be recognized in total top-tier banking organizations other interested parties. Overall, while capital, as well as the limitations on the domiciled in the United States with $50 most commenters supported more amount of certain capital instruments billion or more in total assets, including robust capital standards and the (for example, term subordinated debt) disclosures related to regulatory capital agencies’ efforts to improve the that could be included in tier 2 capital. instruments. In addition, the proposal would have resilience of the banking system, many required banking organizations to C. The Advanced Approaches Notice of commenters expressed concerns about include in common equity tier 1 capital Proposed Rulemaking the potential costs and burdens of accumulated other comprehensive The Advanced Approaches NPR various aspects of the proposals, income (AOCI) (with the exception of proposed revisions to the advanced particularly for smaller banking gains and losses on cash-flow hedges approaches rule to incorporate certain organizations. A substantial number of related to items that are not fair-valued aspects of Basel III, the 2009 commenters also requested withdrawal on the balance sheet), and also would Enhancements, and subsequent of, or significant revisions to, the have established new limits on the consultative papers. The proposal also proposals. A few commenters argued amount of minority interest a banking would have implemented relevant that new capital rules were not organization could include in regulatory provisions of the Dodd-Frank Act, necessary at this time. Some capital. The proposal also would have including section 939A (regarding the commenters requested that the agencies established more stringent requirements use of credit ratings in agency perform additional studies of the for several deductions from and regulations),18and incorporated certain economic impact of part or all of the adjustments to regulatory capital, technical amendments to the existing proposed rules. Many commenters including with respect to deferred tax requirements. In addition, the Advanced asked for additional time to transition to assets (DTAs), investments in a banking Approaches NPR proposed to codify the the new requirements. A more detailed organization’s own capital instruments market risk rule in a manner similar to discussion of the comments provided on and the capital instruments of other the codification of the other regulatory particular aspects of the proposals is financial institutions, and mortgage capital rules under the proposals. provided in the remainder of this servicing assets (MSAs). The proposed Consistent with Basel III and the 2009 preamble. revisions would have been incorporated Enhancements, under the Advanced 1. Applicability and Scope into the regulatory capital ratios in the Approaches NPR, the agencies proposed prompt corrective action (PCA) further steps to strengthen capital The agencies received a significant framework for depository institutions. requirements for internationally active number of comments regarding the banking organizations. This NPR would proposed scope and applicability of the B. The Standardized Approach Notice have required advanced approaches Basel III NPR and the Standardized of Proposed Rulemaking banking organizations to hold more Approach NPR. The majority of The Standardized Approach NPR appropriate levels of capital for comments submitted by or on behalf of proposed changes to the agencies’ counterparty credit risk, credit valuation community banking organizations S2 general risk-based capital rules for adjustments (CVA), and wrong-way risk; requested an exemption from the ULE determining risk-weighted assets (that would have strengthened the risk-based proposals. These commenters suggested R D with ias b, tahnek icnaglc ourlgaatinoinza otifo tnh’es driesnko-bmaisneadt or of cseacpuitrailt irzeaqtiuoinre emxepnotssu froers cbeyr traeiqnu iring boargsainngiz sauticohn a’sn a esxseemt spiztieo—n foonr eax baamnpklien,g O PR capital ratios). The proposed changes advanced approaches banking total assets of less than $500 million, $1 VN1 were intended to revise and harmonize billion, $10 billion, $15 billion, or $50 T Q the agencies’ rules for calculating risk- billion—or on its risk profile or business SK67 weighted assets, enhance risk 781o8–S7e ne osteec)t. ion 939A of Dodd-Frank Act (15 U.S.C. model. Under the latter approach, the D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations 55345 commenters suggested providing an significantly reduce the availability of the capital markets resulting from exemption for banking organizations capital for low- and moderate-income reduced profit and from dividend with balance sheets that rely less on communities. Another commenter restrictions associated with the capital leverage, short-term funding, or stated that the U.S. Congress has a buffers. The commenters also asserted complex derivative transactions. policy of encouraging the creation of that the recovery of the U.S. economy In support of an exemption from the MDIs and expressed concern that the would be impaired by the proposals as proposed rule for community banking proposed rules contradicted this a result of reduced lending by banking organizations, a number of commenters purpose. organizations that the commenters argued that the proposed revisions to In contrast, however, a few believed would be attributable to the the definition of capital would be overly commenters supported the proposed higher costs of regulatory compliance. conservative and would prohibit some application of the Basel III NPR to all In particular, the commenters expressed of the instruments relied on by banking organizations. For example, one concern that a contraction in small- community banking organizations from commenter stated that increasing the business lending would adversely affect satisfying regulatory capital quality and quantity of capital at all job growth and employment. requirements. Many of these banking organizations would create a commenters stated that, in general, more resilient financial system and 3. Competitive Concerns community banking organizations have discourage inappropriate risk-taking by Many commenters raised concerns less access to the capital markets forcing banking organizations to put that implementation of the proposals relative to larger banking organizations more of their own ‘‘skin in the game.’’ would create an unlevel playing field and could increase capital only by This commenter also asserted that the between banking organizations and accumulating retained earnings. Owing proposed scope of the Basel III NPR other financial services providers. For to slow economic growth and relatively would reduce the probability and example, a number of commenters low earnings among community impact of future financial crises and expressed concern that credit unions banking organizations, the commenters support the objectives of sustained would be able to gain market share from asserted that implementation of the growth and high employment. Another banking organizations by offering proposal would be detrimental to their commenter favored application of the similar products at substantially lower ability to serve local communities while Basel III NPR to all banking costs because of differences in taxation providing reasonable returns to organizations to ensure a level playing combined with potential costs from the shareholders. Other commenters field among banking organizations proposals. The commenters also argued requested exemptions from particular within the same competitive market. that other financial service providers, sections of the proposed rules, such as 2. Aggregate Impact such as foreign banks with significant maintaining capital against transactions U.S. operations, members of the Federal with particular counterparties, or based A majority of the commenters Farm Credit System, and entities in the on transaction types that they expressed concern regarding the shadow banking industry, would not be considered lower-risk, such as potential aggregate impact of the subject to the proposed rule and, derivative transactions hedging interest proposals, together with other therefore, would have a competitive rate risk. provisions of the Dodd-Frank Act. Some The commenters also argued that of these commenters urged the agencies advantage over banking organizations. application of the Basel III NPR and to withdraw the proposals and to These commenters also asserted that the Standardized Approach NPR to conduct a quantitative impact study proposals could cause more consumers community banking organizations (QIS) to assess the potential aggregate to choose lower-cost financial products would be unnecessary and impact of the proposals on banking from the unregulated, nonbank financial inappropriate for the business model organizations and the overall U.S. sector. and risk profile of such organizations. economy. Many commenters argued that 4. Costs These commenters asserted that Basel III the proposals would have significant was designed for large, internationally- negative consequences for the financial Commenters representing all types of active banking organizations in response services industry. According to the banking organizations expressed to a financial crisis attributable commenters, by requiring banking concern that the complexity and primarily to those institutions. organizations to hold more capital and implementation cost of the proposals Accordingly, the commenters were of increase risk weighting on some of their would exceed their expected benefits. the view that community banking assets, as well as to meet higher risk- According to these commenters, organizations require a different capital based and leverage capital measures for implementation of the proposals would framework with less stringent capital certain PCA categories, the proposals require software upgrades for new requirements, or should be allowed to would negatively affect the banking internal reporting systems, increased continue to use the general risk-based sector. Commenters cited, among other employee training, and the hiring of capital rules. In addition, many potential consequences of the proposals: additional employees for compliance commenters, in particular minority restricted job growth; reduced lending purposes. Some commenters urged the depository institutions (MDIs), mutual or higher-cost lending, including to agencies to recognize that compliance banking organizations, and community small businesses and low-income or costs have increased significantly over development financial institutions minority communities; limited recent years due to other regulatory (CDFIs), expressed concern regarding availability of certain types of financial changes and to take these costs into S2 their ability to raise capital to meet the products; reduced investor demand for consideration. As an alternative, some ULE increased minimum requirements in the banking organizations’ equity; higher commenters encouraged the agencies to R D with cimurprleenmt eenntvaitrioonnm oef ntht ea npdro uppoosned caonmd pcolinasnocleid caotsiotsn; iancctriveaitsye,d s pmeecrigfiecrasl ly cmoinnsiimdeurm a rseigmuplaleto irnyc creaapsieta iln the O PR definition of capital. One commenter in rural markets, because banking requirements, suggesting that such an VN1 asked for an exemption from all or part organizations would need to spread approach would provide increased T Q of the proposed rules for CDFIs, compliance costs among a larger protection to the Deposit Insurance SK67 indicating that the proposal would customer base; and diminished access to Fund and increase safety and soundness D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e 55346 Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations without adding complexity to the interest rate risk, such as the use of mortgage19and asserted that when regulatory capital framework. derivative instruments. considered together with the proposed mortgage treatment, the combined effect B. Comments on Particular Aspects of 2. Residential Mortgages could have an adverse impact on the the Basel III Notice of Proposed Rulemaking and on the Standardized The Standardized Approach NPR mortgage industry. Approach Notice of Proposed would have required banking 3. Trust Preferred Securities for Smaller Rulemaking organizations to place residential FDIC-Supervised Institutions mortgage exposures into one of two In addition to the general comments categories to determine the applicable The proposed rules would have described above, the agencies received a risk weight. Category 1 residential required all banking organizations to significant number of comments on four mortgage exposures were defined to phase-out TruPS from tier 1 capital particular elements of the proposals: the include mortgage products with under either a 3- or 10-year transition requirement to include most elements of underwriting and product features that period based on the organization’s total AOCI in regulatory capital; the new have demonstrated a lower risk of consolidated assets. The proposal would framework for risk weighting residential default, such as consideration and have required banking organizations mortgages; and the requirement to phase documentation of a borrower’s ability to with more than $15 billion in total out TruPS from tier 1 capital for all repay, and generally excluded mortgage consolidated assets (as of December 31, banking organizations. products that included terms or other 2009) to phase-out of tier 1 capital any 1. Accumulated Other Comprehensive characteristics that the agencies have non-qualifying capital instruments Income found to be indicative of higher credit (such as TruPS and cumulative risk, such as deferral of repayment of preferred shares) issued before May 19, AOCI generally includes accumulated principal. Residential mortgage 2010. The exclusion of non-qualifying unrealized gains and losses on certain exposures with higher risk capital instruments would have taken assets and liabilities that have not been characteristics were defined as category place incrementally over a three-year included in net income, yet are 2 residential mortgage exposures. The period beginning on January 1, 2013. included in equity under U.S. generally agencies proposed to apply relatively Section 171 provides an exception that accepted accounting principles (GAAP) lower risk weights to category 1 permits banking organizations with total (for example, unrealized gains and residential mortgage exposures, and consolidated assets of less than $15 losses on securities designated as higher risk weights to category 2 billion as of December 31, 2009, and available-for-sale (AFS)). Under the residential mortgage exposures. The banking organizations that were mutual agencies’ general risk-based capital proposal provided that the risk weight holding companies as of May 19, 2010 rules, most components of AOCI are not assigned to a residential mortgage (2010 MHCs), to include in tier 1 capital reflected in a banking organization’s exposure also depended on its LTV all TruPS (and other instruments that regulatory capital. In the proposed rule, ratio. could no longer be included in tier 1 consistent with Basel III, the agencies capital pursuant to the requirements of proposed to require banking The agencies received a significant section 171) that were issued prior to organizations to include the majority of number of comments objecting to the May 19, 2010.20However, consistent AOCI components in common equity proposed treatment for one-to-four with Basel III and the general policy tier 1 capital. family residential mortgages and purpose of the proposed revisions to The agencies received a significant requesting retention of the mortgage regulatory capital, the agencies number of comments on the proposal to treatment in the agencies’ general risk- proposed to require banking require banking organizations to based capital rules. Commenters organizations with total consolidated recognize AOCI in common equity tier generally expressed concern that the assets less than $15 billion as of 1 capital. Generally, the commenters proposed treatment would inhibit December 31, 2009 and 2010 MHCs to asserted that the proposal would lending to creditworthy borrowers and phase out their non-qualifying capital introduce significant volatility in could jeopardize the recovery of a still- instruments from regulatory capital over banking organizations’ capital ratios due fragile housing market. Commenters ten years.21 in large part to fluctuations in also criticized the distinction between benchmark interest rates, and would category 1 and category 2 mortgages, result in many banking organizations asserting that the characteristics 19See, e.g., the definition of ‘‘qualified mortgage’’ in section 1412 of the Dodd-Frank Act (15 U.S.C. moving AFS securities into a held-to- proposed for each category did not 129C) and ‘‘qualified residential mortgage’’ in maturity (HTM) portfolio or holding appropriately distinguish between section 941(e)(4) of the Dodd-Frank Act (15 U.S.C. additional regulatory capital solely to lower- and higher-risk products and 78o–11(e)(4)). mitigate the volatility resulting from would adversely impact certain loan 20Specifically, section 171 provides that deductions of instruments ‘‘that would be required’’ temporary unrealized gains and losses products that performed relatively well under the section are not required for depository in the AFS securities portfolio. The even during the recent crisis. institution holding companies with total commenters also asserted that the Commenters also highlighted concerns consolidated assets of less than $15 billion as of proposed rules would likely impair regarding regulatory burden and the December 31, 2009 and 2010 MHCs. See 12 U.S.C. 5371(b)(4)(C). lending and negatively affect banking uncertainty of other regulatory 21See 12 U.S.C. 5371(b)(5)(A). While section 171 organizations’ ability to manage initiatives involving residential of the Dodd-Frank Act requires the agencies to S2 liquidity and interest rate risk and to mortgages. In particular, these establish minimum risk-based and leverage capital D with RULE mlciomamiintmst.au iCnnoi ctmyo mmbaepnnlkitaeinnrscg e roe wrpgriatenhsi elzneagttiainolg nl esn idni ng cccooumnmcmuelreannt irtveeerg sai mredxpipnarcget st ohsefe d tph coeot pennrsoitdipaeolr saebdl en ew racreegaqgepuunitlicaarilete imrsoe nreqesnut,ta isirin enscmu tlbhuejedneiitcrnst g gute onun dcneeedrraret loar aittnhuh etelhri Nm olaraiiwtttaiyost intaooann leds sB, ttaahnbekl i sAhc t, RO particular asserted that they lack the mortgage requirements combined with 12 U.S.C. 1, et seq., Federal Reserve Act, Federal P QTVN1 soorgpahnisiztiactaiotinosn t oof u lsaerg ceerr btaainnk riinsgk - trhelea Dtinodg dto-F trhaen dk eAficnti’tsi orenqsu oifr eqmuaelnitfsie d DInetperonsaitt iIonnsaulr aLnecned Aincgt ,S Buapnekrv Hisoilodni nAgc Ct,o 1m2 pUa.nSy.C A. ct, SK67 management techniques for hedging mortgage and qualified residential 3U9.S0.1C, .e 1t 4s6eq1.,, eatn sde qH. ome Owners Loan Act, 12 D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations 55347 Many commenters representing aspects of the Basel III NPR and the reduction in the riskiness of banking community banking organizations Standardized Approach NPR to all organizations’ funding mix, and that the criticized the proposal’s phase-out banking organizations, with some increase in funding cost was entirely schedule for TruPS and encouraged the significant changes. Implementing the passed on to borrowers. Given these agencies to grandfather TruPS in tier 1 interim final rule in a consistent fashion assumptions, the analysis concluded capital to the extent permitted by across the banking system will improve there would be a slight increase in the section 171 of the Dodd-Frank Act. the quality and increase the level of cost of borrowing and a slight decrease Commenters asserted that this was the regulatory capital, leading to a more in the growth of gross domestic product. intent of the U.S. Congress, including stable and resilient system for banking The analysis concluded that this cost this provision in the statute. These organizations of all sizes and risk would be more than offset by the benefit commenters also asserted that this profiles. The improved resilience will to gross domestic product resulting from aspect of the proposal would unduly enhance their ability to continue a reduced likelihood of prolonged burden community banking functioning as financial intermediaries, economic downturns associated with a organizations that have limited ability to including during periods of financial banking system whose lending capacity raise capital, potentially impairing the stress and reduce risk to the deposit is highly vulnerable to economic lending capacity of these banking insurance fund and to the financial shocks. organizations. system. The FDIC believes that, The agencies’ analysis also indicates together, the revisions to the proposals that the overwhelming majority of C. Overview of the Interim Final Rule meaningfully address the commenters’ banking organizations already have The interim final rule will replace the concerns regarding the potential sufficient capital to comply with the FDIC’s general risk-based capital rules, implementation burden of the new capital rules. In particular, the advanced approaches rule, market risk proposals. agencies estimate that over 95 percent of rule, and leverage rules in accordance The FDIC has considered the concerns all insured depository institutions with the transition provisions described raised by commenters and believe that would be in compliance with the below. After considering the comments it is important to take into account and minimums and buffers established received, the FDIC has made substantial address regulatory costs (and their under the interim final rule if it were modifications in the interim final rule to potential effect on FDIC-supervised fully effective immediately. The interim address specific concerns raised by institutions’ role as financial final rule will help to ensure that these commenters regarding the cost, intermediaries in the economy) when FDIC-supervised institutions maintain complexity, and burden of the the FDIC establishes or revises their capacity to absorb losses in the proposals. regulatory requirements. In developing future. Some FDIC-supervised During the recent financial crisis, lack regulatory capital requirements, these institutions may need to take advantage of confidence in the banking sector concerns are considered in the context of the transition period in the interim increased banking organizations’ cost of of the FDIC’s broad goals—to enhance final rule to accumulate retained funding, impaired banking the safety and soundness of FDIC- earnings, raise additional external organizations’ access to short-term supervised institutions and promote regulatory capital, or both. As noted funding, depressed values of banking financial stability through robust capital above, however, the overwhelming organizations’ equities, and required standards for the entire banking system. majority of banking organizations have many banking organizations to seek The agencies participated in the sufficient capital to comply with the government assistance. Concerns about development of a number of studies to revised capital rules, and the FDIC banking organizations arose not only assess the potential impact of the believes that the resulting because market participants expected revised capital requirements, including improvements to the stability and steep losses on banking organizations’ participating in the BCBS’s resilience of the banking system assets, but also because of substantial Macroeconomic Assessment Group as outweigh any costs associated with its uncertainty surrounding estimated loss well as its QIS, the results of which implementation. rates, and thus future earnings. Further, were made publicly available by the The interim final rule includes some heightened systemic risks, falling asset BCBS upon their completion.22The significant revisions from the proposals values, and reduced credit availability BCBS analysis suggested that stronger in response to commenters’ concerns, had an adverse impact on business and capital requirements help reduce the particularly with respect to the consumer confidence, significantly likelihood of banking crises while treatment of AOCI; residential affecting the overall economy. The yielding positive net economic mortgages; tier 1 non-qualifying capital interim final rule addresses these benefits.23To evaluate the potential instruments; and the implementation weaknesses by helping to ensure a reduction in economic output resulting timeframes. The timeframes for banking and financial system that will from the new framework, the analysis compliance are described in the next be better able to absorb losses and assumed that banking organizations section and more detailed discussions of continue to lend in future periods of replaced debt with higher-cost equity to modifications to the proposals are economic stress. This important benefit the extent needed to comply with the provided in the remainder of the in the form of a safer, more resilient, new requirements, that there was no preamble. and more stable banking system is reduction in the cost of equity despite Consistent with the proposed rules, expected to substantially outweigh any the interim final rule requires all FDIC- short-term costs that might result from 22See ‘‘Assessing the macroeconomic impact of supervised institutions to recognize in S2 the interim final rule. the transition to stronger capital and liquidity regulatory capital all components of RULE In this context, the FDIC is adopting raevqauiliarbemle eant:t sh’’t t(pM:/A/wGw Awn.balisy.soirsp),u AbltItoacthhpm1e2n.pt dEf,. aSlesoe AOCI, excluding accumulated net gains D with mthoe smt ainspimecutsm o rfi tshke-b parsoepdo csaaplsi,t ailn cluding aimlspoa ‘c‘Rt esstuudltys, ’o’ fA thttea cchommepnret hFe, naslsivoe a qvuaialnatbiltea taivt:e arenlda tleo tsos etsh eo nh ecdasghin-fgl oowf i theemdsg etsh atht aatr e O R requirements, the capital conservation http://www.bis.org/publ/bcbs186.pdf. not recognized at fair value on the P TVN1 and countercyclical capital buffers, and im2p3aScete o ‘f‘ Astnro ansgseers scmapeintat lo af nthde l ilqounigd-tietyrm economic balance sheet. However, while the FDIC Q many of the proposed risk weights. The believes that the proposed AOCI SK67 FDIC has also decided to apply most rAetqtaucirhemmeenntt sG,’.’ Executive Summary, pg. 1, treatment results in a regulatory capital D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e 55348 Federal Register/Vol. 78, No. 175/Tuesday, September 10, 2013/Rules and Regulations measure that better reflects FDIC- makes an AOCI opt-out election may certain depository institution holding supervised institutions’ actual loss incorporate up to 45 percent of any net companies to phase out their non- absorption capacity at a specific point in unrealized gains on AFS preferred stock qualifying tier 1 capital instruments time, the FDIC recognizes that for many classified as an equity security under from regulatory capital over ten years. FDIC-supervised institutions, the GAAP and AFS equity exposures into Although the agencies continue to volatility in regulatory capital that could its tier 2 capital. believe that non-qualifying instruments result from the proposals could lead to An FDIC-supervised institution that do not absorb losses sufficiently to be significant difficulties in capital does not make an AOCI opt-out election included in tier 1 capital as a general planning and asset-liability on the Call Report filed for the first matter, the agencies are also sensitive to management. The FDIC also recognizes reporting period after the FDIC- the difficulties community banking that the tools used by larger, more supervised institution becomes subject organizations often face when issuing complex FDIC-supervised institutions to the interim final rule will be required new capital instruments and are aware for managing interest rate risk are not to recognize AOCI (excluding of the importance their capacity to lend necessarily readily available for all accumulated net gains and losses on can play in local economies. Therefore, FDIC-supervised institutions. cash-flow hedges that relate to the the final rule adopted by the Federal hedging of items that are not recognized Reserve allows certain depository Accordingly, under the interim final at fair value on the balance sheet) in institution holding companies to rule, and as discussed in more detail in regulatory capital as of the first quarter include in regulatory capital debt or section V.B of this preamble, an FDIC- in which it calculates its regulatory equity instruments issued prior to supervised institution that is not subject capital requirements under the interim September 12, 2010 that do not meet the to the advanced approaches rule may final rule and continuing thereafter. criteria for additional tier 1 or tier 2 make a one-time election not to include The FDIC has decided not to adopt capital instruments but that were most elements of AOCI in regulatory the proposed treatment of residential included in tier 1 or tier 2 capital capital under the interim final rule and mortgages. The FDIC has considered the respectively as of September 12, 2010 instead effectively use the existing commenters’ observations about the up to the percentage of the outstanding treatment under the general risk-based burden of calculating the risk weights principal amount of such non-qualifying capital rules that excludes most AOCI for FDIC-supervised institutions’ capital instruments. elements from regulatory capital (AOCI existing mortgage portfolios, and has opt-out election). Such an FDIC- D. Timeframe for Implementation and taken into account the commenters’ supervised institution must make its Compliance concerns that the proposal did not AOCI opt-out election in its properly assess the use of different In order to give non-internationally Consolidated Reports of Condition and mortgage products across different types active FDIC-supervised institutions Income (Call Report) filed for the first of markets in establishing the proposed more time to comply with the interim reporting period after it becomes subject risk weights. The FDIC is also final rule and simplify their transition to to the interim final rule. Consistent with particularly mindful of comments the new regime, the interim final rule regulatory capital calculations under the regarding the potential effect of the will require compliance from different FDIC’s general risk-based capital rules, proposal and other mortgage-related types of organizations at different times. an FDIC-supervised institution that rulemakings on credit availability. In Generally, and as described in further makes an AOCI opt-out election under light of these considerations, as well as detail below, FDIC-supervised the interim final rule must adjust others raised by commenters, the FDIC institutions that are not subject to the common equity tier 1 capital by: (1) has decided to retain in the interim final advanced approaches rule must begin Subtracting any net unrealized gains rule the current treatment for residential complying with the interim final rule on and adding any net unrealized losses on mortgage exposures under the general January 1, 2015, whereas advanced AFS securities; (2) subtracting any risk-based capital rules. approaches FDIC-supervised unrealized losses on AFS preferred Consistent with the general risk-based institutions must begin complying with stock classified as an equity security capital rules, the interim final rule the interim final rule on January 1, under GAAP and AFS equity exposures; assigns a 50 or 100 percent risk weight 2014. The FDIC believes that advanced (3) subtracting any accumulated net to exposures secured by one-to-four approaches FDIC-supervised gains and adding any accumulated net family residential properties. Generally, institutions have the sophistication, losses on cash-flow hedges; (4) residential mortgage exposures secured infrastructure, and capital markets subtracting amounts recorded in AOCI by a first lien on a one-to-four family access to implement the interim final attributed to defined benefit residential property that are prudently rule earlier than either FDIC-supervised postretirement plans resulting from the underwritten and that are performing institutions that do not meet the asset initial and subsequent application of the according to their original terms receive size or foreign exposure threshold for relevant GAAP standards that pertain to a 50 percent risk weight. All other one- application of those rules. such plans (excluding, at the FDIC- to four-family residential mortgage A number of commenters requested supervised institution’s option, the loans, including exposures secured by a that the agencies clarify the point at portion relating to pension assets junior lien on residential property, are which a banking organization that meets deducted under section 22(a)(5) of the assigned a 100 percent risk weight. If an the asset size or foreign exposure interim final rule); and (5) subtracting FDIC-supervised institution holds the threshold for application of the any net unrealized gains and adding any first and junior lien(s) on a residential advanced approaches rule becomes S2 net unrealized losses on held-to- property and no other party holds an subject to subpart E of the proposed ULE maturity securities that are included in intervening lien, the FDIC-supervised rule, and thus all of the provisions that R D with AbaOseCdI. cCaopnitsails treunlet sw, ictohm thmeo gne neqeruailt yr itsike-r ienxsptoitsuutrioe na sm au ssitn tgrleea tl otahne sceocmubreinde bdy a abpanpklyin tgo oarng aandivzaanticoend. aInp ppraoratcichuelsa r, O PR 1 capital includes any net unrealized first lien for purposes of assigning a risk commenters requested that the agencies VN1 losses on AFS equity securities and any weight. clarify whether subpart E of the T Q foreign currency translation adjustment. The agencies also considered proposed rule only applies to those SK67 An FDIC-supervised institution that comments on the proposal to require banking organizations that have D mcdonald on VerDate Mar<15>2010 17:14 Sep 09, 2013 Jkt 229001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\10SER2.SGM 10SER2 e

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Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, . III. Summary of General Comments on the Basel III Notice of Proposed Rulemaking
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